Wage Theft Is Grim Business

Wage theft is particularly prevalent among low-wage workers, such as those in the restaurant, retail, home health care and personal and repair services industries. Misclassification touches more traditionally middle class industries, such as construction and trucking.

05/19/2014 10:38 am ETUpdated
Jul 19, 2014

If Al Capone introduced Americans to the seriousness of tax evasion, then hopefully Michael Grimm's indictment will do the same for the seriousness of wage theft.

For two years the federal government probed Congressman Grimm's campaign finances, focused on allegations that potentially hundreds of thousands of dollars were illegally funneled into his campaign through straw donors. The known details were nothing if not colorful (including a globe-trotting celebrity rabbi under investigation in Israel for bribery), like Congressman Grimm himself, who was caught on tape threatening to throw a local television reporter off the balcony in Congress -- but only after telling him, "I'll break you in half like a boy."

While two of Congressman Grimm's fundraisers were indicted, one for using straw donors to contribute more than $10,000 to Congressman Grimm's first election campaign, and another -- the rabbi's close aide -- for visa fraud, the government this week indicted Congressman Grimm for something else entirely: defrauding the government by, among other things, underreporting the wages he paid to employees of a health food restaurant before his election to congress, and perjuring himself in a civil lawsuit brought by employees who claimed to have been denied minimum wage and overtime pay.

Wage theft is a pervasive problem in the United States, and it takes many forms: failure to pay the minimum hourly wage; failure to pay overtime wages ("time and a half"); shortchanging workers on the real number of hours worked, or failing to count time spent on supposed "off the clock" activities like preparation or clean-up; and failing to pay workers at all, particularly immigrant workers. Nearly as pernicious is wage theft's close cousin -- misclassification of an employee as an independent contractor. Misclassification avoids paying social security and Medicare taxes and obtaining workers' compensation and unemployment insurance, leaving employees unable to avail themselves of these benefits -- even though they worked to achieve them.

Wage theft is particularly prevalent among low-wage workers, such as those in the restaurant, retail, home health care and personal and repair services industries. Misclassification touches more traditionally middle class industries, such as construction and trucking. Both cost the American worker billions of dollars each year, and put legitimate businesses who follow the rules at a competitive disadvantage. (Though wage theft isn't limited to the poor and uneducated toiling in a hot kitchen restaurant -- witness the imminent settlement of a class-action antitrust lawsuit brought by 64,000 engineers against four of America's leading tech firms, Google, Apple, Intel and Adobe, for conspiring to not hire each other's employees in order to restrain competition and keep wages low.)

A 2009 study of wage theft among low-wage workers in Los Angeles, Chicago and New York City by the National Employment Law Project found approximately $2.9 billion in stolen wages. Over a quarter of those surveyed were cheated out of their minimum wage in the prior work week, over three quarters did not receive the overtime pay they were entitled to, and 70 percent weren't compensated for "off the clock" work they performed. Not surprisingly, workers paid in cash (Congressman Grimm's alleged specialty) suffered markedly higher wage theft rates as those paid by check, including double the rate of minimum wage violations.

Misclassification is also rampant. A 2007 study by Cornell University's School of Industrial and Labor Relations found that in New York state alone, nearly 40,000 employers misclassified over 700,000 employees as independent contractors, including nearly 15 percent of the state's construction workforce -- that's 700,000 people left out in the cold when it comes to social security, Medicare, workers' compensation and unemployment insurance.

Of course, wage theft and misclassification don't merely hurt the cheated worker; taxpayers get fleeced, too. This is where Congressman Grimm finds himself in hot water. The federal government loses Social Security and Medicare revenue. State workers' compensation and unemployment insurance systems become stretched, in some cases to the brink of insolvency. Governments at all levels lose income tax revenue.

The public's tools to combat wage theft are growing. In the last five years, New York state has enacted laws increasing and expanding civil and criminal penalties for unpaid wages, broadened reporting and notice requirements and strengthened anti-retaliation protections. The state also passed laws tightening independent contractor rules in two industries notorious for its misclassification of workers: construction and trucking.

While tax, wire and mail fraud are the mainstays of federal white collar prosecutions, the justice department's willingness to apply those heavy hammers essentially in defense of protecting wages and the integrity of our wage-based retirement and income security system should remind all employers that cheating working people is serious business.